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April 3, 2014

SEC Seeks Comments on Target-Date Fund Marketing

Feedback sought on developing a target-date glide path illustration based on a standardized measure of fund risk

Even pension pros underestimate the risk of some target-date funds, the Investor Advisory Committee says.

The Securities and Exchange Commission said Thursday that it is seeking comment on a recommendation by its Investor Advisory Committee that it develop a target-date glide path illustration based on a standardized measure of fund risk.

In 2010, the SEC proposed new requirements for the marketing of target-date funds, including a requirement to present a “graphical or tabular depiction of changes in the fund’s asset allocation over time,” or its glide path.

The SEC said Thursday that it is also reopening that proposal for comment in order to seek feedback on glide path illustrations.

“I greatly appreciate the input of the Investor Advisory Committee on this important matter and I look forward to carefully considering comments received on the committee’s recommendation,” said SEC Chair Mary Jo White.

The Investor Advisory Committee told the SEC in its recommendation, issued in April 2013, that the “dramatic drop in value in 2008 of some target-date funds that were close to reaching their advertised target date brought new attention to the significant differences in risk levels that exist among funds with identical target dates.”

Target-date funds typically start out heavily invested in equities and tilt toward bonds and cash as the target retirement date nears. But there is wide variation in asset allocations among funds. After the market crashed in 2008, some 2010-dated funds still had more than 60% of their assets in equities, devastating soon-to-be retirees at a time when they could ill afford it.

Some funds are intended to build savings up to the target date and keep a flat, conservative allocation thereafter to reduce risk — a to glide path — while others, intended to help investors save through retirement, have a larger equity allocation at the target date and become more conservative more gradually.

Even pension professionals underestimate the amount of risk at retirement in some funds, the investor committee said, urging the SEC to expand upon its 2010 proposal.

“In addition to improving the marketing material provided to investors, the Commission should seek to ensure that retirement plan consultants also receive the information they need to make sound decisions about which target-date funds are included on the menu of retirement plan options and offered as default investments in those plans,” the committee said.

“The goal should be to ensure that the information provides an accurate and easily comparable depiction of fund risk, does so in a manner that is objective, is not easily gamed, and is sufficiently flexible to apply to different methods of managing risk and to allow for continuing innovation among target-date funds.”

The committee also noted the increasing use of target-date funds by workers. Assets of target-date funds totaled approximately $485 billion at the end of 2012, up 29% over the previous year. The committee cites another study that found that roughly 70% of U.S. employers report offering target-date funds as their default investment option for company sponsored defined contribution plans.

The comment period will run for 60 days after the Investor Advisory Committee recommendation is published in the Federal Register.

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